Inventory Overview - Accounting Software Secrets
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Inventory Overview

Inventory Overview


According to GAAP, inventory (i.e. personal tangible property) can be defined in one of three ways: 

  • 1.      Held for sale in the ordinary course of business;
  • 2.      In the process of production for sale; or
  • 3.      Consumed in the production of goods or services to be available for sale. 

For the later two options, QuickBooks is not an appropriate solution.  For manufacturing, work in process, and/or consumables, another software package should be explored.  QuickBooks does work well when inventory is purchased and then sold without changes to it.  The only exception may be light manufacturing that simply groups items together for sale without the need to add labor or other burden amounts into inventory.  New with Premier Version 2003 is the added type of inventory assembly.

After determining that the type of inventory matches the limitations for using QuickBooks, the next factor to be addressed is the basis that the inventory will have on the Balance Sheet.  Inventory is a Current Asset type of account, which is set up as part of the chart of accounts in QuickBooks.  The inventory, according to GAAP should be recorded at cost, which includes all direct and indirect costs incurred to prepare it for sale.  Since the inventory is being purchased as it is being sold, this is usually not an issue.  Assuming that as the inventory is purchased all costs are included (i.e. any packaging, freight, etc.) in the amount recorded in QuickBooks for each item.  There are several exceptions to this general rule, such as including indirect costs, the lower of cost or market, certain conditions that may make an amount in excess of cost acceptable, etc.  Those alternatives are beyond the scope of these materials, and for the most part, QuickBooks.  Assuming that the cost will be basis for valuing the inventory, the next decision is which method will be used.  For a complete discussion of what and how items should be recorded for a specific business, please consult with an accounting professional.

Average Cost

The method of inventory valuation to be used for GAAP, should be the one that most accurately matches the cost of goods sold with the related sales. QuickBooks uses a perpetual inventory system with a moving average cost.  After each purchase or sale, a new average cost is computed, as opposed to the calculation at the end of the period (periodic inventory system).  As an item is sold, the average cost at that point is used for the amount to be charged to cost of goods sold.  According to GAAP, this is an approved method; however, it is not the best method for all business entities.  If average cost is an appropriate method, and the inventory procedures are applied consistently (i.e. a purchase of the item is recorded prior to sale, and subsequent purchases and sales are recorded in the order they occurred), no additional adjustments may be needed prior to issuing the financial statements.  There are several reports that will aid in the preparation of work papers and in performing analytical procedures.   If another method is to be used, such as first-in, first-out or last-in, first-out, there is not an automated solution from QuickBooks but a manual valuation adjustment can be entered. The same is true if the business is required to capitaize warehousing costs.

QuickBooks has an inventory feature that will track the quantity on hand for inventory parts in the item list.  Once the items have been set up, QuickBooks will do the following:

  • ·        Assist in completing ordering information on purchase orders for vendors
  • ·        For Premier Version 2003 and higher permit building assembly units
  • ·        Assist in completing sales information on sales receipts and invoices for customers
  • ·        Record sales and cost of goods sold in the general ledger as items are sold
  • ·        Compute the value of the inventory balance as items are received and sold
  • ·        Show the average cost by item
  • ·        Warn when a sale is being created for a higher quantity that what is calculated to be on hand

This is a powerful tool and, when used correctly, can provide valuable financial and management information to the business owner and Accountant.  Some examples include: trends in items sold to better manage inventory levels, sales detail to analyze items needed for seasonal fluctuations, gross profit results to determine which items should be expanded, decreased, or require price changes, inventory valuation to determine if the levels of inventory on hand are reasonable, not to mention more accurate financial results for management and planning purposes.

QuickBooks uses the average cost method of valuing inventory as items as purchased and sold.  Because of the way in which QuickBooks calculates the value of the inventory, it is extremely important to record the purchase of items prior to the sale.  Although the software will permit you to sell items you do not have, it is not recommended.

List Limits Expanded

For most QuickBooks users, the list limit for the QuickBooks Pro and Premier products of 14,500 is sufficient.  For some, however, that is not the case.  We have been seeing increased list size for a variety of reasons.  One of the most common is the increased number of customers as the result of web site sales.  For version 6 and prior, the list limit was doubled for the Enterprise Solutions Product.  New with version 7, the Enterprise Solutions limit has been removed.



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